Consumer Staples Sector
DavidCody Ying Gao Jimmy Mace
Agenda
*  Sector Overview *  Business Analysis *  Economic Analysis *  Financial Analysis *  Valuation analysis *  Recommendation Sector Overview
Sector Size
Sector Weight for SIM 1.96% 2.53% Consumer Discretionary Consumer Staples 0.90% 2.95% Energy 11.09% 9.71% 21.83% 9.13% Financials 13.86% 19.01% 2.38% 2.98% 3.50% 11.98% 9.41% Health Care Industrials IT 7.02% Sector Weight for S&P 19.44% 10.32% Materials Telecom Utilities Cash 10.35% 13.57% 16.09% Industry Overview
Size of the sector: $1.84 T Industries Within Staples: *  Household & Personal Products *  Food, Beverage, and Tobacco *  Food & Staples Retailing The Key Players
*  Walmart (WMT) *  Proctor and Gamble (PG) *  Coca-­‐Cola (KO) *  PepsiCo (PEP) *  Philip Morris (PM)
Industry Overview cont.
*  Top 5 Companies = roughly 50% of total weight *  40 Total Members *  All 3 sub-­‐industries represented within top 5 companies Performance
*  Year to Date Ø +5.29%, (10/20/14) *  Quarter to Date Ø +0.21%, (10/20/14)
Business Analysis
Demand and Life Cycle
*  Demand for this sector remains constant throughout good and bad economic times *  Relatively predictable demand leads to ease of supply matching for producers *  Many suppliers offer high-­‐end and low-­‐end product offerings *  Consumer staples are non-­‐
cyclical (defensive) due to their strong demand in each season/ economic condition *  Steady dividends and low beta offer investors protection against riskier assets Investor’s Assessment
*  Number of quality assets to serve as insurance for investors *  The large sector offers diversification *  Consistent dividends and predictable earnings *  Consumers are unwilling or unable to cut these items out of their budget, regardless of financial situation Market Timing
User Geography
*  Staples are consumer necessities throughout the US, supplied on a constant basis *  Revenue growth in emerging markets becoming key for mature companies *  Brand recognition important amongst foreign competition Competitive Analysis
Porters Five Forces Model for Competition Level Threat of New Entrants Low Analysis Extremely capital intensive to run an adequate operation Must achieve economies of scale to compete on price Determinants of Supplier Power Low Many Suppliers in this space Abundance of materials gives low price negotiation Determinants of Buyer Power High Highly price sensitive customers will buy based on cost Seek best value and have low brand loyalty Threat of Substitutes Moderate Most products compete using same price & quality, free-­‐riders achieve sales New product development sees growth then steady decline as competitors match product Rivalry Amongst Existing Firms High The big players move to other industries and countries in lock-­‐step with each other Compete using low price & standardized product offerings Industry Adjustments
*  Tobacco Industry *  Products now require warning labels *  Experts expect drop in usage amongst teens *  Soft Drink Industry *  Offering lower calorie products *  Focusing in foreign markets *  Toiletries and Cleaning Products *  Lower prices due to financial crisis *  Substitute products took market share Economic Analysis
CONS VS. S&P
CONS VS. S&P
Driving Factors *  Business conditions in the consumer staples sector have remained relatively steady over recent quarter Ø  Stable commodity pricing Ø  Solid global economic backdrop
*  Factors •  Overall Economic •  Consumer Price Index •  Consumer Confidence •  Unemployment •  Commodity Price •  Dollar Value Financial Analysis
EPS of CONS VS. S&P
*  EPS of CONSvs. S&P •  Over last 25+ years •  EPS lower, but much steadier •  Not as susceptible to larger pullbacks EPS of CONS VS. S&P
PM of CONS VS. S&P
*  Profit Margin of CONSvs. S&P •  Over last 25+ years •  Margin lower, but much more consistent •  Trending up last few years •  Down recently vs. flat S&P CONS VS. S&P
*  Revenue per Share of CONSvs. S&P •  Over last 25+ years •  RPS lower, but much more consistent •  Trending up last few years •  Again, no huge fluctuations Valuation Analysis
Absolute Basis
Absolute Basis
High
P/E
20.71
Low
Median
Current
25 11.4
17.31
18.84
20 High 15 P/B
5.36
2.75
2.98
4.62
Low Median 10 P/S
1.58
0.69
1. 06
1.22
P/EBITDA
10.73
6.06
9.10
10.57
•
Sector is expensive relative to history Current 5 0 P/E P/B P/S P/EBITDA Relative to S&P500
Relative to SP500
High
Low
Median
Current
P/E
1.26
0.61
1.07
1.05
2.5 2 High 1.5 P/B
1.95
1.33
1.66
1.70
Low Median 1 Current P/S
1.06
0.69
0.80
P/EBITDA
1.65
1.13
1.32
•
0.71
1.16
0.5 0 P/E Sector is close to historical average relative to S&P 500 P/B P/S P/EBITDA Industry comparison
1 Month Consumer Staples 0.61% Household & Personal Products 0.21% Food Beverage & Tobacco 0.51% Food & Staples Retailing 1.22% 3 Month 1.89% 2.84% 2.05% 0.64% YTD Price per Earnings Price to Sales Dividend Yield 6.50% 18.4 1.22 2.86% 1.37% 16.3 1.9 2.97% 9.26% 14.9 1.5 3.11% 5.21% 14.3 0.4 2.05% 10.00% 20 9.00% 18 8.00% 16 Consumer Staples 7.00% 6.00% 14 12 Household & Personal Products 10 3.00% Food Beverage & Tobacco 6 2.00% Food & Staples Retailing 2 5.00% 4.00% 1.00% Price per Earnings 8 4 Price to Sales 0 0.00% 1 Month 3 Month YTD Dividend Yield Consumer Household Food Food & Staples & Personal Beverage & Staples Products Tobacco Retailing Food, Beverage & Tobacco
*  The largest industry group in sector *  Success comes from the fact that as a group they’ve earned exceptional returns on their equity across history Recommendations
Increase Holdings
*  Food & Beverage Industry *  Soft Drinks & Juices *  Alcohol *  Child Care and Feminine Products *  High birth rates internationally *  Stronger focus on women in Brazil, China, & Russia Decrease Holdings
*  More volatile industries with uncertain future *  Companies focused primarily in US exports *  Stronger dollar makes exporting tough Q&A
Thanks!